Why Origin Investments’ Co-CEO Foresees A Rising Tide Of Multifamily Deals

Origin Investments hasn’t bought real estate since February 2020. But now the company is preparing to close on its first property in over four years.

In a few weeks, the firm with $2.2B under management is set to acquire a 300-unit, garden-style multifamily property in suburban Dallas, co-CEO David Scherer told Bisnow in an interview Friday. And it’s not a one-and-done purchase — he’s also looking at a “somewhat distressed deal” in an unspecified location for around $100M.

The company’s dive back into the investment pool is emblematic of where Scherer sees the multifamily investment market heading. 

“You're going to see more transactions because people understand now where the market is, and interest rates also are becoming less volatile, which will also help,” he said. 

Multifamily sales volume in May was down 44% from last year, which was already down from the previous year, according to MSCI.

But Scherer said three massive deals from two of the country’s largest investment giants in recent months are helping push money back into the market.

Last week, KKR acquired an 18-property portfolio for $2.1B, purchasing north of 5,000 apartments from Quarterra. 

Also last week, Blackstone closed on a $10B deal to purchase AIR Communities and its 27,100 apartment units across 10 states. The all-cash purchase, in which it also assumed all of AIR’s debt, penciled out to $39.12 per share.

That came after Blackstone in May closed on its $3.5B deal for single-family rental developer Tricon Residential. The all-cash deal was for Tricon’s 38,000 single-family rentals in the Sun Belt and apartment developments in Toronto.

Scherer said deals like these help set the signposts for where multifamily pricing stands.

“The collective professional real estate community knows pretty quickly where this stuff traded on a price per pound, on the cap rate, where the borrowing rate was, etc.,” he said. “There's sort of an anchor.” 

Meanwhile, the volatility in interest rates has cooled enough to stabilize the market, he said.

“We're kind of consolidating around this 4% to 4.5% range,” he said. “And that's a good thing. Because one of the things real estate needs is a more stable, predictable interest rate so that we can price assets and feel OK about it.”

Adding to the bullish perspective, Scherer pointed to fundamentals in the multifamily sector.

Apartment demand is expected to far outpace supply in the coming years, as few new projects are getting off the ground. Construction starts are down 70% this year from their 2022 peak, according to CBRE, which said that by 2026, new deliveries will be reduced to less than half of the current level.

Meanwhile, Scherer said elevated interest rates are keeping people renting longer.

“We have machine learning that we've developed over the last four or five years, it's been incredibly accurate. It’s predicting really strong rent growth over the next two to five years,” he said. “And I think it's right. Intuitively, it feels right.”

Scherer said that during the pandemic, Origin executives saw the pricing as so out of whack that it didn’t make sense to buy, so the company pivoted to lending.

“We wanted to be in a much safer part of the capital structure because we thought that there was an asymmetric tail to the downside,” he said. “Stuff was trading at three and a half cap routinely, and that's not, in my opinion, sustainable when multifamily real estate historically grows at 3%.”

By Scherer’s estimation, KKR purchased its properties at around a 5% cap rate — “a lot better” than it would have been 18 or 20 months ago, he said. 

But at current interest rates, that cap rate would likely make the properties negatively leveraged. 

“That's the part that's hard for me. And I know, if you were in the investment committee at KKR, like, hard for them, hard for Blackstone when they bought AIR,” he said. “It's difficult to have negative leverage on deals. It’s not impossible. You rely on growth.” 

While it isn't all blue skies for today's multifamily buyer, Scherer expects transactions like these will help realign the market and get it moving again. 

“The Blackstone deal, the KKR deal and just deals I'm seeing in general are establishing enough volume at a price ... that lenders and equity are going to become comfortable coming in to buy this new level,” he said.